Buying your first commercial real estate property is a substantial financial commitment. There are differences to consider even for well-informed residential buyers. Like all other property strategies, commercial real estate requires extensive due diligence and, above all else, time and commitment. To help find your feet on the first step of the commercial property ladder, here is our guide on how to buy your first commercial real estate property.
Each property investor will have a strategy tailored to their success, and it may very well be different from yours. Part of that strategy could include deciding whether or not to invest in commercial real estate.
Commercial properties have proven to generate lucrative results for successful investors. To be successful, identify the type of commercial property you intend to purchase. You can consider countless variations, such as industrial units, office blocks, retail or leisure and hospitality spaces (and so many more). Identifying one niche of commercial property type will help you buy your first commercial property. In addition to identifying your niche, you will need to decide which type of investment strategy is right for you. Some of these successful strategies include:
One of the most tried and tested strategies involves buying raw land and developing it into a new commercial opportunity.
This is virtually the same as its counterpart in residential property. Purchase a development, renovate it to modern standards, and sell it at a higher value.
Land Banking is a term allocated to the process of buying raw land that is likely to grow in value from a development perspective and selling it on in the future.
Commonly referred to as the BRRRR strategy, this process involves a step-by-step process that can be templated into multiple opportunities. This strategy is ideal once you have identified a niche and are experienced with that area.
Buying a commercial real estate property is not a one-person task, especially when it’s your first time. It requires administration work, financial backing, development expertise, and contractors to carry out the necessary work.
It would be advantageous to educate yourself by watching or listening to how other investors/property mentors carry out their commercial real estate strategies. There are numerous business podcasts and resources that can help you shape a knowledge base that will be beneficial when investing in commercial real estate properties for the first time.
The next step will be to then partner with the following:
A Specialist Broker
Subscribe to the emails of a broker who specializes in the type of commercial real estate property you are looking to buy. Create conversations with them and get booked in on viewings they recommend. Fostering a good relationship with a specialist broker can potentially open up access to deals in the future before they hit the open market.
A Commercial Real Estate Attorney
Partnering with a commercial real estate attorney who is well-versed in commercial property laws will give you the insight and handle the legalities of purchasing a commercial property, which can vary significantly from buying residential real estate. They can review and negotiate the pricing on your behalf, check on the legalities such as zoning restrictions, land-use, and environmental issues, and help regarding funding agreements.
A Commercial Real Estate Contractor
Contractors who specialize in commercial real estate have a different mindset to residential real estate, and utilizing it is vital to understand your development. They can give you costs for any refurbishment work and point out issues that you may not identify on your first commercial real estate property investment.
A Commercial Real Estate Agent
You should also consider partnering with a specialist in commercial real estate for the sale and purchase of the properties you intend to look at or invest in. Their local insight, in-depth knowledge of the market, and efficient deal execution can help minimize risk yet maximize returns.
As with all property investment strategies, if the figures refuse to stack up, then you shouldn’t invest.
You need to assess the purchase price, estimated refurbishments costs, and projected rental statistics for the return on investment. These figures should be kept in an organised format, such as an Excel spreadsheet. This will help you visualize and compare deals against each other to see which ones stack up the most.
Additionally, you will also need to look at the financing required for the development. Ideally, you should seek to source the funding before looking for commercial properties, as this will allow you to identify how much you can realistically afford. Deals can be much easier to source, negotiate and secure when funding is already in place.
Underwriting at least one deal a day can give you the practice required to put together the figures and know whether they are worth committing to. You shouldn’t be afraid of sharing your figures with your team during your first (or even first few) investments to ensure you are making the right choice.
It is a time-consuming process (which can be outsourced at a cost), but becoming skilled at underwriting deals is critical to being a successful investor.
Once you have grasped the underwriting process and can identify potential deals, you can look to make offers.
As tempting as it may seem to dive headfirst into making as many offers as possible, you should limit how many offers you make to keep track easily. Putting together a letter of intent is one of the simpler processes in buying your first commercial real estate property, and there is no risk involved.
You should keep track of any offers placed, including the proposed figures, the date of initial contact reached, and whether or not the offer has been accepted, is pending, or declined. In the event an offer is rejected, you should look to find out the reasoning behind it (it may not always be down to an offer being too low), and there could be opportunities to negotiate.
The trademarks REALTOR®, REALTORS®, and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. The trademarks MLS®, Multiple Listing Service® and the associated logos are owned by The Canadian Real Estate Association (CREA) and identify the quality of services provided by real estate professionals who are members of CREA. The trademark DDF® is owned by The Canadian Real Estate Association (CREA) and identifies CREA's Data Distribution Facility (DDF®).
The trademarks REALTOR®, REALTORS®, and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA. The trademarks MLS®, Multiple Listing Service® and the associated logos are owned by The Canadian Real Estate Association (CREA) and identify the quality of services provided by real estate professionals who are members of CREA. The trademark DDF® is owned by The Canadian Real Estate Association (CREA) and identifies CREA's Data Distribution Facility (DDF®).
